How Much Is My Business Worth?

Why there’s no simple formula

You may have heard rules of thumb, like “two times revenue” or “three times profit.” These shortcuts can be useful for a rough starting point, but they ignore what makes your business different from the next one. Two companies with the same sales can be worth very different amounts depending on their profit margin, customer base, and how well they run without the owner.

The IRS has recognized this for decades. Its long-standing guidance on valuing closely held companies states that no single formula applies to every case, and that value must be based on all the relevant facts of the specific business [1].

What is Seller’s Discretionary Earnings (SDE), and why does it matter for valuation?

For most small, owner-operated service businesses, valuation starts with a number called Seller’s Discretionary Earnings, or SDE. SDE estimates the total financial benefit one full-time owner gets from the business in a year. It starts with the business’s pre-tax profit and adds back items like the owner’s salary, personal expenses run through the business, and one-time costs that a new owner wouldn’t have to pay [2].

SDE matters because your tax return is built to minimize taxable income, not to show a buyer what the business is really worth to them. Rebuilding, or “normalizing,” the earnings gives buyers and sellers a more honest number to work from.

Once SDE is calculated, buyers and brokers typically apply a multiple to it to estimate value. The multiple isn’t fixed — it moves up or down based on the factors below.

What factors make one business worth more than another with similar sales?

A buyer is really asking one question: how much risk am I taking on, and how much of this income will continue after I take over? Factors that tend to increase the multiple include:

• Owner independence. The business runs well even when the owner is out.
• Diverse customers. No single client makes up a large share of revenue.
• Recurring revenue. Contracts, subscriptions, or repeat customers, rather than one-time jobs.
• Clean financial records. Tax returns, profit-and-loss statements, and a balance sheet that clearly support the reported earnings.
• Growth trend. Revenue and profit have been stable or growing, not declining.
• Trained staff and systems. Documented processes so the business doesn’t depend on one person’s memory.

Factors that tend to lower the multiple include heavy owner dependence, customer concentration, inconsistent records, and a shrinking or highly competitive market.

A simple illustration

Suppose a service business shows $180,000 in SDE after add-backs, and comparable businesses in that industry and size range typically sell for two to three times SDE. That would put a rough estimate between $360,000 and $540,000. This is a hypothetical example only. Your actual multiple depends on your industry, size, location, and the specific strengths or risks in your business.

Should I get a formal valuation or a broker’s opinion of value?

An owner’s estimate, an online calculator, and a formal valuation can produce very different results, because each uses different assumptions and levels of detail. A business appraiser, valuation professional, or experienced business broker can review your actual financial records, compare your business to real market transactions, and account for the specific risks and strengths that a generic formula can’t capture. This becomes more important if the valuation will be used for a sale, a partner buyout, estate planning, or a tax filing, since those situations often have specific legal or accounting requirements.

A practical first step is gathering three years of tax returns, profit-and-loss statements, and a current balance sheet. Clean, organized records make any valuation more accurate and give you a clearer picture before you talk to a buyer, broker, or appraiser.